In autumn 2008, as Lehman Brothers was collapsing and the solvency of every other investment bank was cast into doubt, senior executives at Goldman Sachs were conducting lengthy discussions about which managing directors should be promoted to partner.

The rationale was clear: global financial crises come and go, but Goldman Sachs endures. And it endures, at least in part, because of its near-mythic partnership structure. Yoel Zaoui, a former co-head of global M&A at Goldman Sachs who left this year, said: “In the fall of 2008, in the midst of the worst financial crisis in the investment banking industry, we went through the exact same process as always – it just shows how critical it is.” Michael Sherwood, co-chief executive officer of Goldman Sachs International, said: “In 2018, when those people are running the firm, it will be clear why we spent the time we did.”

So, in the past few weeks, in the midst of one of the closest US presidential elections in years, and as sandbags were piled up to protect Goldman Sachs’ headquarters in downtown Manhattan from Hurricane Sandy, the biannual partnership selection process continued uninterrupted. This week, the chosen few will get the call.

‘Greatest moment’

In 1998, one Goldman Sachs trader received just such a call from Lloyd Blankfein, then co-head of the fixed-income, currency and commodities division at the bank and now its chief executive. Blankfein said: “Don’t tell my wife this, but being made partner was the greatest moment of my life,” the trader recalled. This partner, who has since left the bank, said: “It is a wonderful strategy for the firm to have people care about it so much. People define themselves by it; it wrecked a lot of guys I know who didn’t make it.”

William Cohan, author of Money and Power: How Goldman Sachs Came to Rule the World, said: “If you’re going to work on Wall Street and not put any net worth at risk, there’s no bigger opportunity than Goldman Sachs and becoming one of those 400 partners.”

Being given that opportunity can inspire fierce loyalty. Lee Cooperman, billionaire founder of hedge fund manager Omega Partners and former head of Goldman Sachs Asset Management, became a partner in 1976 and retired in 1991: “I had close to a 25-year love affair with Goldman Sachs.”

Few argue that attaining this status has got any easier. A former analyst at the bank said: “I’d put making partner at Goldman above making it big in hedge funds or private equity. In those industries you can get lucky.”

Related

But, in interviews with over two dozen current and former Goldman Sachs partners, one question hung in the air: is being a partner at the bank still what it used to be?

Goldman Sachs certainly faces more and bigger challenges than at any other time in its 143-year history. Tough economic conditions and the regulatory onslaught play their part. But perhaps even more damaging has been the public opprobrium heaped on the bank.

Chris Grigg, chief executive at British Land, and a former 20-year veteran and partner at Goldman, who left in 2004, said: “Of course, the prestige of the firm has been affected by the general view that banks are bad places and bankers are bad people. This effect has been exacerbated by the perception that some bankers are of the criminal classes and Goldman Sachs is a giant vampire squid.”

This last comment is a reference to the highly critical article published in Rolling Stone magazine in 2010, which appeared to strike a chord. More recently, Greg Smith, a former vice-president at the bank, wrote an article in The New York Times and then published a book claiming Goldman Sachs’ culture had become toxic and staff put their own interests ahead of clients. The bank has also been the subject of a number of US Senate probes and court cases.

Drain on morale

The onslaught has been morale-sapping. Grigg said that some partners have found it hard to come to terms with this: “It has been shocking for partners who believe themselves to have risen to the top of a best-in-class organisation, to find that they are working for an organisation that is pilloried by all and sundry.”

The pay isn’t what it used to be either. One former partner, who left in 2010, said: “It is more challenging now for partner to mean anything. In the past, when you could earn $50m as a partner, that was very different. Today, the gap between the pay of a managing director and partner is probably 10 times smaller than it used to be.”

But many Goldman Sachs partners argue that, for the partnership system to work, pay must be a secondary consideration – although that is sometimes easier said than achieved.

Jim O’Neill, chairman of Goldman Sachs Asset Management, said: “[Former co-chief operating officer] John Thornton used to passionately argue that you could improve the commercial abilities of a Goldman partner but you could not as easily improve that person’s understanding of the culture. We strive to make sure that being a partner is not just some commercial badge, but recognition of the genuine long-term stewardship and the future of the firm.”

In 2008, the bank posted its first quarterly loss since its flotation, losing $2.1bn in the fourth quarter of the year. One senior partner told Blankfein the firm should seriously consider not paying partners or managing directors any cash compensation for the next three years, according to someone familiar with the discussions. But the plan was nixed due to fears of an exodus.

This tension between “commercial effectiveness”, as the bank calls it, and culture is central to what it means to be a Goldman Sachs partner.

While Goldman Sachs decided to open its doors and become a public company in 1999, behind the scenes, the bank was determined to find a way to maintain its partnership culture.

Glenn Earle, a former chief operating officer of Goldman Sachs who retired last year, said that, in the initial 1998 poll of partners, he voted against an IPO: “I was worried that the fabric and culture of the firm would change if it were no longer a partnership.” In the second vote, Earle backed the IPO: “The thing that convinced me in the end, though, was the idea of maintaining the partnership concept and structure within a public company.”

Zaoui said: “The idea of keeping the partnership structure within the context of a public company was brilliant, as it maintained that ethos. I think it was one of the best ideas the firm has ever had.”

Goldman Sachs went to the public market in order to secure the capital it felt it needed to grow. Since 1999, Goldman’s headcount has more than doubled from 15,000 to 33,000, according to its annual reports. Cooperman said: “If it didn’t change and grow it would have atrophied.”

But, of course, this meant Goldman partners were no longer partners in the legal sense. For most of Goldman’s history, partners put their entire net worth on the line. This was not merely a theoretical obligation: twice in the 30 years leading up to the listing – in 1970 and 1994 – the bank drew on the partnership pool for capital. Cohan said: “Of course, the term ‘partner’ is misleading now. It’s marketing. It’s branding.”

-- Points mean prizes

Prior to the IPO, each Goldman partner was allocated “partnership points”, which determined how much they earned. Cooperman said: “I was called into the partnership in 1976, when the bank had just had a record year and earned $40m pre-tax. The salary was $50,000, and I had three quarters of a percentage point stake in the partnership, which that year would have meant a bonus of $300,000.”

Mike Novogratz, former president of Goldman Sachs Latin America, who made partner in 1998, said: “You went into negative cashflow when you first became a partner. They thought: ‘If we make these guys too rich too quick they’ll spend too much time with their architect and their yacht designer, and not enough time making money for the firm.’”

He added: “New partners got paid the same. The guy running the trading business, who was in his mind king of the world, was paid the same as the guy in operations. It allowed the firm to put very talented people into less glamorous roles, and move stars to start new businesses.”

Partnership points still exist, according to Goldman bankers, but have become a dusty relic that no longer determines remuneration. Partners are entitled to a share of the bank’s profits. But these are divided up by the senior management team on a discretionary basis. One US M&A banker said: “The discretionary component [of our pay package] got bigger and the fixed component went down every year.” A former partner at Goldman Sachs said: “You’re not an economic partner.”

-- Trading places

Between 2001 and 2007, Goldman made $175bn in net revenues. But some parts of the bank contributed more than others. Its securities trading and principle investments division – which houses equities, fixed income, currency and commodities trading, and invested the firm’s own capital – made just over $116bn, or 66% of total revenues. It was arguably the best-performing business on Wall Street for most of the 2000s.

The rise of the securities division, and changes in pay policy inevitably gave rise to tensions within the bank.

Steve Windsor, a senior financing banker at Goldman Sachs, who was made partner in 2008, said: “Goldman looks at three things: your commercial effectiveness; your managerial and entrepreneurial skills; and your culture and values. All three are weighted equally and it is the right balance of the three combined that will determine whether you make partner or not.” However, another current partner said: “Unofficially, commercial effectiveness is above [the rest]. It helps you stand out.”

Scott Gieselman, a 20-year veteran of Goldman and a former regional head of the investment bank’s natural resources business in the US, said: “The culture of the firm was migrating, and it was migrating due to the fantastic profitability of the principal trading element of the firm as compared to the advisory business. Within the investment banking division, the incentive was being driven more towards creating principle opportunities within your client base by using the relationships that had been generated over decades of careful cultivation and advisory work to try and maximise the profitability within a proprietary trading context.

“Ultimately, that changed the nature of the job within investment banking. And, ultimately, that changed the firm’s relationship with the client.”

Proprietary traders became some of the youngest and best-paid partners at Goldman Sachs. Eric Mindich was made partner in 1994 when he was leading the bank’s equity arbitrage division. He was 27 and the youngest person to ever be made a Goldman Sachs partner.

A Goldman Sachs insider said the composition of the management committee can be seen as a proxy for the firm’s priorities. In 1999, the year Goldman Sachs went public, just four of the 22-strong management committee came from, or were former members of, the securities division, compared with nine investment bankers. The remainder were lawyers, asset managers and operational staff. By 2008, there were 12 from the securities trading division, nine from investment banking, and eight from the rest of the firm.

-- Team Goldman

Goldman Sachs partners are supposed to put the bank first. Sherwood said: “Part of being a partner is putting your own personal ambitions behind the ambitions of the firm, especially in difficult years.”
Pierre-Henri Flamand, a former partner who was head of Goldman Sachs Principal Strategies, its largest internal proprietary trading desk, said: “It’s very important to be seen as promoting the business of the entire firm, not just your own business. Teamwork is paramount at Goldman and one of the reasons why it is such a great firm to work for.”

But of course that raises questions about what is in the best interests of the bank and over what time horizon. The rise of certain factions within the partnership pool may result in different parts of the business, with different priorities and different time horizons, vying for dominance.

However, the influx of new partners every two years is a “great psychological drive”, according to a current partner, because it ensures no one, and no division, can rest on their laurels.

The Goldman Sachs partnership pool is a fixed size. So, as new partners join, old partners must make way. Cohan said: “Only a small handful of people get to stay. Everyone else gets eased out and they know that. I give Goldman Sachs a lot of credit for that. It’s very healthy and it sends out a strong, positive message to the younger people.” Even within the partnership, this process, known as “de-partnering” or “defanging”, is shrouded in mystery. One former partner said: “In the end, you know who’s been eased out. People don’t show up at the partnership meeting.”

This bi-annual “self-correcting mechanism”, as one former partner put it, and new or impending regulations, such as the so-called Volcker rule that will likely hamper certain trading activities, have resulted in the investment banking division slowly regaining the ascendancy at Goldman Sachs.
Today, there are 11 investment bankers on the management committee, compared with just eight from the securities division.

One member of the management committee said: “We didn’t make many prop traders partners. It was always a big bone of contention among them. As fantastic as they may have been as prop traders, many did not pass the test on the cultural side. Some of them left because they didn’t get made partner.”

Managing directors put forward for promotion will spend the first half of this week on tenterhooks. While the official announcement is not until Wednesday, some managers soften the blow, taking unsuccessful candidates aside before then to break the news. The longer there is no news, the more likely it is to be good news: the approximately 100 managing directors who make the grade will receive their phone call before the announcement on Wednesday.

Information about who has got the nod will then leak out and the rest of the industry will catch a glimpse of how Goldman Sachs views its future.